Canada has a rich history of innovation, but in the next few decades, powerful technological forces will transform the global economy. Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being. The Financial Post set out explore what is needed for businesses to flourish and grow. You can find all of our coverage here.

OTTAWA — In November 2017, the head of Google LLC’s parent company praised Prime Minister Justin Trudeau for Canada’s advances in artificial intelligence, saying he was “enormously thankful to Canadians” for its contributions to AI research and, by extension, its contributions to Google’s bottom line.

Alphabet Inc. chairman Eric Schmidt, who was speaking to Trudeau at a Google event in Toronto, explained how the company had built much of its cutting-edge software, which it later sold through various finished products, in Canadian office spaces.

“We now use it throughout our entire business and it’s a major driver of our corporate success,” he said. “So we owe you.”

The comments probably gratified many in the room, but for some it was a reminder that Canada, for all its advances in research and development, routinely gives away huge chunks of its intellectual property rights to foreign multinationals — often through the very academic institutions that it pays to develop innovative new technologies and concepts.

Companies such as Google and Apple Inc. increasingly rely on Canadian workers, who come cheaper than those in Silicon Valley, and universities to bolster their corporate know-how, then sell the finished products through U.S. headquarters.

This reliance is a well-known struggle that homegrown companies have to deal with, but some observers say the lax rules around Canada’s university R&D programs have limited the potential economic outputs of those efforts, which have fallen well short of political ambitions.

Federal and provincial bodies funnel approximately $12 billion into research and development efforts every year, according to a 2017 report by the University of Toronto, consisting of a mix of government grants, tax credits, loans and other measures.

But some of those funding efforts may increasingly end up creating IP for foreign companies. In 2016, 58 per cent of the patents granted to Canadian inventors were assigned to companies located in other countries, up from 45 per cent in 2005.

The report found a “glaring gap between invention and ownership” when studying Canada’s ability to generate returns on the patents it develops, ranking it 12th out of 17 nations on this measure.

“It’s pennies on the dollar for the amount of money you put in,” said Jim Hinton, fellow at the Centre for International Governance Innovation.

In Ottawa, federal ministers tend to use every available breath to promote job growth through “innovative” programs, often through consortiums involving university research centres. But Hinton and others say the results of such programs in terms of economic output are so weak that government officials need to reconsider how they are sold to the public.

“We have to say this is a philanthropic thing, we can’t be saying it’s generating money,” Hinton said. “The universities have oversold what they’re able to deliver on.”

The reasons for the shortcoming, if viewed that way, are complicated. Part of the problem, observers say, is that university professors are afforded an immense amount of discretion on which companies they partner with for research, and there is minimal oversight about who they partner with and how. The approach to intellectual property, and who ultimately keeps it, also differs from one university to the next.

Hamid Arabzadeh, founder and chief executive of Ranovus Inc., an Ottawa company that develops efficient infrastructure for data storage systems, said multinational companies have largely crowded out much of the available university research grants. The company in its early stages, he said, had to fight hard just to find somewhat obscure professors that it could work with.

“Pretty much everything that is above the ground level has already been picked up,” he said. “So what we have to do is go find things that are below ground and that have talent.”

That crowding out, at least in the telecom space, Arabzadeh said, is largely a result of Nortel Networks Corp. going bust in 2009, which left a dearth of Canadian firms to lead research and development.

Nortel was instead replaced by major international companies such as Ericsson, Huawei Technologies Co. and Cisco Systems Inc., which have deep pockets and are able to focus their efforts on the most sought-after professors.

“Huawei may have 10 people in Ottawa, and their only job is for each of them to work with five professors, get their IP, send it to China, assess it, shortlist it, get it productized, all with thousands and thousands of people behind them,” Arabzadeh said. “My job is to build a business here that is sustainable, so I cannot assign 10 of my guys to go and work with these professors.”

Ranovus has secured a number of public innovation grants to develop technologies, including $20 million from Ottawa’s Strategic Innovation Fund.

But the ability of Huawei and others to work with select professors also gives them a direct funnel to up-and-coming talent, allowing them to hire the students of the professors they work with, Arabzadeh said.

Canada has a broad suite of government research programs, including the Natural Sciences and Engineering Research Council of Canada (NSERC), Strategic Innovation Fund (SIF), and Ontario Centres of Excellence (OCE), to name just a few.

Graeme Moffat, senior fellow at the Munk School of Global Affairs and Public Policy, said the NSERC research program has some of the lightest restrictions pertaining to how partnerships are formed and that many other programs are similarly open.

For example, some programs might force a foreign company to establish an office in Canada, but don’t put explicit boundaries around who gets to keep the IP.

“There’s money flowing everywhere, without necessarily an overarching strategy to it, other than spend money on innovation,” Moffat said.

NSERC recently laid out a new framework for its research partnership program, and said the “open model of the program enables the research community the flexibility to construct projects that will yield strong outcomes and benefits for all parties.”

Moffat said Canadian universities need to strike more of a “middle ground” with multinationals in their research partnerships in order to retain more IP in Canada. At the very least, he said, there should be provisions in place to ensure more high-skilled workers remain in Canadian tech hubs.

“If highly qualified people who are working on these grants are staying in Canada, then the net benefit to Canada is probably there, because the best IP walks on two legs,” he said. “However, there’s nothing really constraining the movement of intellectual property.”

Despite all the public money going into such research programs, Canada has little hard information on how much economic output the country receives from them.

“It’s been mostly just box checking,” Moffat said.

That Canada loses IP through its university programs is not a new challenge, but observers say the problem could deepen as the government appears increasingly willing to spend on innovation, either directly or indirectly.

Ottawa’s 2018 budget boosted funding for academic institutions by $3.2 billion over the next five years, an increase of 25 per cent. It has also raised direct spending levels.

It was a point Schmidt made in his 2017 conversation with Trudeau, just two years into the Liberal mandate.

“You’ve done a lot, and you’ve done it very quickly,” he said.

Trudeau, perhaps unaware that local firms are broadly unsatisfied with Google’s prominence in Canadian R&D, doubled down on Ottawa’s efforts to secure more foreign research funding, joking that Schmidt was “on record” with his promise to spend more in Canada.

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